Current Intelligence - Retention of ownership may prevent exhaustion

In this Current Intelligence note, published in our June issue, Carina Gommers and Tim Robrechts (Hoyng Rokh Monegier) discuss a recent decision of the Brussels Court of Appeal concerning the exhaustion of trade marks rights with respect to goods (in this case, printer cartridges) provided under a maintenance agreement. The court focused on the interplay between exhaustion and retention of title, possibly going a step beyond the current CJEU's case law on the issue.

Retention of ownership may prevent exhaustion 

Carina Gommers and Tim Robrechts
Hoyng Rokh Monegier
Email: carina.gommers@hoyngrokh.com and tim.robrechts@hoyngrokh.com

Xerox Corporation/Impro Europe BVBA, Brussels Court of Appeal (8th Div.), 20 October 2015, docket n° 2013/AR/2763

In its decision of 20 October 2015, the Brussels Court of Appeal had to rule on exhaustion of trade mark rights in a case with respect to printer cartridges. The court ruled that a contractual retention of ownership may bar exhaustion.

Legal context

Article 9(1)(a) of Council Regulation No 207/2009 of 26 February 2009 on the Community trade mark (‘Community Trade Mark Regulation’ or ‘CTMR’) provides protection against a third party who is, without the trade mark proprietor’s consent, using an identical sign in the course of trade for identical goods or services. The proprietor of a Benelux trade mark is entitled to the same exclusive right per Article 2.20(1) (a) of the Benelux Convention on Intellectual Property (‘BCIP’). In the meantime, Article 9(1) (a) CTMR has been replaced by Article 9(2) (a) of the EU Trade Mark Regulation (Regulation (EU) 2015/2424 of the European Parliament and of the Council of 16 December 2015).

Pursuant to Article 13(1) CTMR, the proprietor of a Community trade mark is not entitled to prohibit its use in relation to goods which have first been put on the market in the Community by the trade mark owner or with his consent (the equivalent provision in the Benelux is Article 2.23(3) BCIP). It should be noted that ‘in the Community’ is to be construed as ‘in the European Economic Area’ (‘EEA’).

Article 13(2) CTMR provides for an exception to the rule of exhaustion of rights: the first paragraph of Article 13 CTMR shall not apply where there exist legitimate reasons for the proprietor of a Community trade mark to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market (the equivalent provision in the Benelux is Article 2.23(3) BCIP).

The numbering of these articles remains unchanged in the new EU Trade Mark Regulation.

Facts

Impro Europe BVBA (‘Impro’) is a Belgian subsidiary of Impro Group, a US-based company specializing in the trade of supplies and parts for copiers and printers, with a focus on so-called consumables (eg toner cartridges). Impro buys unused toner cartridges and sells them through its webshop.

Xerox Corporation (‘Xerox’) sells a wide range of office consumables such as toner cartridges for private and professional use through its Belgian subsidiary Xerox NV. Xerox is the holder of various trade marks (ia ‘XEROX’, ‘PagePack’, ‘eClick’ and ‘Phaser’).

Various types of Xerox machines come with a standard maintenance agreement (‘PagePack’ or ‘eClick’ agreements) providing not only for technical support, but also the provision of toner cartridges. Cartridges provided in the framework of such a maintenance agreement bear the trade marks ‘PagePack’ or ‘eClick’. In addition, these mention the term ‘metered’, indicating that their supply depends on the meter configuration of the end user’s Xerox machine. According to the terms of the maintenance agreement, Xerox retains the title of these cartridges until depletion and surplus goods have to be returned to Xerox without compensation.

Xerox discovered that Impro offered this type of cartridge bearing the aforementioned trade marks in combination with the term ‘metered’ on the Belgian market. Xerox therefore requested and obtained descriptive seizure measures, after which it launched infringement proceedings against Impro.

Analysis

According to the first judge, Xerox’s products bearing the ‘PagePack’ or ‘eClick’ trade marks were put on the market with Xerox’s consent, thus resulting in the exhaustion of Xerox’s exclusive rights. Based on the exception to the exhaustion rule (Article 13(2) CTMR), the first judge nevertheless ordered Impro to destroy the Xerox consumables that were expired or on which packaging was damaged.

The Brussels Court of Appeal, however, rejects Impro’s exhaustion defence. The court considers that there were various indications that Xerox did not put its cartridges provided in the framework of a maintenance agreement on the market in the EEA, neither did Xerox consent to have said cartridges commercialized on the EEA market by a third party.

Firstly, the court establishes that the PagePack and eClick agreements contain a retention of title clause in favour of Xerox as well as an obligation to return unused cartridges without compensation. In support of the latter obligation, Xerox submitted evidence of correspondence with end users regarding the uncompensated return of surplus toner cartridges as well as evidence of an employee position specifically dedicated to the implementation and follow-up of this return policy.

Secondly, the Brussels Court of Appeal also found that Xerox took further precise precautionary measures to clearly externalize the contractual restriction—ie the retention of title—by distinguishing the cartridges at issue from those sold without maintenance services. In particular, they have a different packaging, and bear the PagePack or eClick trade marks. In addition, the cartridges could not be ordered through the regular purchase channel for all Xerox users without a maintenance agreement. Although not a trade mark, the court finally considers the use of the term ‘metered’ in combination with the ‘Phaser’ and ‘XEROX’ trade marks as another indication that the respective cartridges were supplied in accordance with a maintenance agreement and thus subject to the retention of title and return clauses.

Thirdly, the Brussels Court of Appeal held it important that these type of contractual restrictions were not uncommon in the sector and that Impro should have been aware thereof, since it is a professional reseller operating in the same sector.

Impro’s argument that the Xerox products were effectively acquired by Xerox’s clients as they were already paid for through the maintenance fee was rejected by the court. According to the court, Xerox’s cartridges were merely put at the disposal of the end user in the scope of a maintenance agreement and were indeed not placed on the market by Xerox, nor with its consent. The court ruled that Xerox’s trade mark rights are therefore not exhausted and considered Impro’s trade in such cartridges infringing.

Practical significance

The Brussels Court of Appeal ruled that contractual provisions—in combination with specific circumstances—that convey the trademark proprietor’s intention may prevail over exhaustion rules. Hence, the fact that the trade mark proprietor’s intention is somehow externalized seems to be decisive and not the trade mark proprietor’s intention as such.

The court’s reasoning is in line with the CJEU’s ruling in the Coty Prestige v Simex case (CJEU, 3 June 2010, C-127/09) and the Copad v Dior case (CJEU, 23 April 2009, C-58/09). The CJEU held in those cases that contractual restrictions imposed by the trade mark owner may indeed bar exhaustion. According to the CJEU in Coty Prestige v Simex, such contractual post-sale restrictions may indeed be effective insofar as they are externalized, namely visible for third parties (eg explicit ‘demonstration’ and ‘not for sale’ notices on perfume packaging). Hence, such contractual restrictions will necessarily have an impact on the position of third parties (see, to the contrary, CJEU, 30 November 2004,Peak Holding v Axolin-Elinor, C-16/03, where the CJEU held that contractual restrictions barring exhaustion could only affect the relationship between the parties to the contract).

At the same time, we consider that this decision of the Brussels Court of Appeal goes further than what was already decided by the CJEU, since the former court has not considered it not required that restrictions such as a retention of title are explicitly mentioned on the packaging of the product. Externalization by other means (eg through either a dedicated trade mark or sign, or a specific word) seems to suffice. This opens the door for different contractual possibilities and more importantly different means of externalization thereof to convey the trade mark proprietor’s intention to the downstream purchaser.

A discussion on the possible effect of post-sale restrictions vis-à-vis third parties also led to a recent decision in the US. The United States Court of Appeals for the Federal Circuit held that such restrictions with respect to patented goods may have effect against any subsequent purchasers having knowledge thereof, even in the absence of a contractual relationship (Lexmark Int’l, Inc. v Impression 24 Prods., Inc., Nos. 14-1617, -1619, 12 February 2016). Also there, third parties’ knowledge of the patentee’s intention appears to be the decisive factor.

It will be interesting to see to what extent the CJEU, if and when confronted with similar facts, will confirm that trade mark proprietors may contractually mitigate exhaustion rules, especially in cases where the contractual restrictions are supported by less obvious accompanying circumstances.

© The Author(s) (2016). Published by Oxford University Press. All rights reserved.

Anything but tired: the doctrine of exhaustion in Canada

Here's the Guest Editorial for the November 2015 issue of JIPLP, by editorial board member and Canadian academic Emir Crowne (Associate Professor, with Tenure, University of Windsor, Faculty of Law):

Anything but tired: the doctrine of exhaustion in Canada

With the recent US Supreme Court decisions in Kirtsaeng v John Wiley & Sons, 133 S. Ct. 1351 and Bowman v Monsanto, 569 U. S. ____ (2013) the doctrine of exhaustion has once again been revitalized. In its most basic formulation the doctrine stands for the proposition that the enforceability of the intellectual property rights embodied in a tangible object are extinguished, or ‘exhausted’, after its first sale. The rule, common law in origin, allows for the downstream re-sale of patented articles, trade mark adorned clothing, and textbooks without infringement. This brief editorial examines the common law and statutory footing of the doctrine in Canada (1), and encourages courts to ‘supplement’ their decisions and give the doctrine ‘wings’, as it were.

In Canada, the Copyright Act (2)  contains the only statutory footing for the doctrine. Even then it is quite limited. Section 3 of that Act sets out the exclusive rights of copyright holders and provides the following, inter alia:

“3. (1) For the purposes of this Act, “copyright”, in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever, to perform the work or any substantial part thereof in public or, if the work is unpublished, to publish the work or any substantial part thereof, and includes the sole right …

(j) in the case of a work that is in the form of a tangible object, to sell or otherwise transfer ownership of the tangible object, as long as that ownership has never previously been transferred in or outside Canada with the authorization of the copyright owner, and to authorize any such acts.”

There are no express provisions in either the Patent Act (3) or the Trade-marks Act (4) that cover the doctrine, even in a limited sense. Even when one turns to the jurisprudence, although the doctrine is recognized, no decision specifically refers to the “exhaustion” of the intellectual property right in question.

Consider the indirect discussion of patent exhaustion by the Supreme Court of Canada (5) in Eli Lilly and Co. v Apotex.(6) Justice Iacobucci, writing for a unanimous court, stated:

“unless otherwise stipulated in the licence, a licensee is generally entitled to pass to a purchaser the right to use or resell the patented article without fear of infringing the patent.(7)

Likewise, in Consumers Distributing Co. v Seiko (8) the Supreme Court of Canada dealt with the parallel importation of watches. In allowing the appeal, the court affirmed that lawfully acquired goods may be re-sold without any recourse under the Trade-marks Act:

“the distribution of a trade marked product lawfully acquired is not, by itself, prohibited under the Trade Marks Act of Canada, or indeed at common law.”(9)

Yet again there was no explicit recognition that Seiko's rights had been exhausted.(10)

Even in the copyright context the Supreme Court of Canada has invoked the doctrine without giving it due regard. In Théberge v Galerie d'Art du Petit Champlain inc. (11) the court dealt with an art gallery making canvas copies of an artist's work from lawfully obtained cards, photolithographs and posters. A majority of the court cautioned against this “expansion” of the artist's economic rights, emphasizing the need to balance the economic interests of the copyright holder and the public.(12) The majority spent considerable attention on the process (13) not amounting to a “reproduction”. For instance, the Chief Justice (writing for the majority) asked the following:

“Did “reproduction” occur when the paper backing was peeled away? If the resulting film of inks had then been framed and suspended in front of a window like a piece of Tiffany glass, I would think the respondent could not complain. A purchaser has the right to cut up a poster into strips or divide it as he or she wishes. Division cannot logically be characterized as reproduction.” (14)

Building on her earlier remarks that

“The proper balance among these and other public policy objectives lies not only in recognizing the creator's rights but in giving due weight to their limited nature. In crassly economic terms it would be as inefficient to over compensate artists and authors for the right of reproduction as it would be self-defeating to undercompensate them. Once an authorized copy of a work is sold to a member of the public, it is generally for the purchaser, not the author, to determine what happens to it.

Excessive control by holders of copyrights and other forms of intellectual property may unduly limit the ability of the public domain to incorporate and embellish creative innovation in the long-term interests of society as a whole, or create practical obstacles to proper utilization …” (15)

Yet at no point in this narrative was the doctrine of exhaustion explicitly examined.(16)

Arguably it is this lack of clear judicial recognition that has stunted the development of the doctrine in Canada. It is time for Canadian Courts to explicitly apply the doctrine as it is a powerful instrument of trade and competition. It promotes the “balance” that is very much in vogue in the academic literature and the higher courts. The doctrine may be one of exhaustion, but its usage is far from cliché in Canada.

Footnotes 

1 See generally, de Beer, J. and Tomkowicz R., “Exhaustion in Canadian Intellectual Property Law”, (2009) 25 Canadian Intellectual Property Review 3; and Macklin, A. and Leger, J., “International Exhaustion of Industrial (Intellectual) Property Rights”, Report Q 156, AIPPI (available at: https://www.aippi.org/download/commitees/156/GR156canada.pdf).

2 R.S.C., 1985, c. C-42.

3 RSC 1985, c P-4.

4 RSC 1985, c T-13.

5 In Signalisation de Montreal Inc. v Services de Béton Uni­versels Ltée, [1992] F.C.J. No. 1151 the Federal Court of Appeal rationalized the doctrine by reference to an implied licence: “It is settled law that the purchaser of a patented article from a patentee acquires, at the same time, the right to use the article and the right to sell it, together with the same “right of use,” to another person. As long ago as 1871, this right was described as a “licence”…” (citing Betts v Willmott, (1871) L.R. 6 Ch. 239 at 245, per Lord Hatherley, L.C.).

6 [1998] 2 S.C.R. 129 [“Eli Lilly”].

7 Eli Lilly para 69 (emphasis added). The Supreme Court of Canada decision in Monsanto Canada Inc. v Schmeiser [2004] 1 S.C.R. 902 (concerning the cultivation of herbicide resistant canola containing patented genes and cells) is said to be a rejection of patent exhaustion (see de Beer, J. and Tomkowicz R, n 2 supra at 14). However, the underlined portion in Eli Lilly is instructive. Since Monsanto licensed its herbicide resistant seeds, it can hardly be said that its rights were either exhausted or fell foul of the dictum in Eli Lilly.

8 [1984] 1 S.C.R. 583.

9 Consumers Distributing Co. v Seiko Time Canada Ltd [1984] 1 S.C.R. 583. The court likened the situation to that of reselling a car: “The better analogy here would be to the buyer of a Chevrolet from an authorized dealer or source, who then sells the car without any status of dealership from the manufacturer. Assuming title to the car was lawfully acquired and that no misrepresentation of the condition of the vehicle and the right of warranty was made, would a duly authorized dealer of the manufacturer, or the manufacturer itself, or anyone else, have recourse to injunction to prevent such a sale of the Chevrolet? Clearly not, and the answer is the same whether the car be new or used.” (citing Morris Motors, Ltd v Lilley, [1959] 3 All E.R. 737).

10 Passing mention is also made in Coca-Cola Ltd. v Pardhan (c.o.b. as Universal Exporters), [1999] F.C.J. No. 484 (FCA) upholding an application to strike the appellant's statement of claim.

11 [2002] 2 S.C.R. 336 [“Théberge”].

12 Ibid. at paras 30–33.

13 “The appellants purchased on the open market a quantity of posters of the respondent's artistic works. They subjected these posters to a technique which involved spreading a special resin or laminating liquid across the face of a poster. The resin is designed to bond with the surface inks. After the applied coating is dried (or cured), the coated poster is submerged in a bath of solvent which loosens the paper substrate but leaves intact the fixed ink/resin layer, thus allowing the latter to be peeled off the former. The rear of the ink/resin layer is then coated with a suitable adhesive resin and transferred to a canvas substrate, which is then smoothed and finished.” (Théberge at para 35).

14 Ibid. at para. 37.

15 Ibid. at paras. 31 and 32.

16 For a similar omission see Euro-Excellence Inc. v Kraft Canada Inc. [2007] 3 S.C.R. 20 (concerning the parallel importation of chocolate bars). Here a majority of the court accepted that the copyright in the chocolate bars' labels and logos can be infringed through parallel imports. Justice Fish, in a separate concurring judgment, almost invites a discussion of the doctrine: “Without so deciding, I express grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed in this way into an instrument of trade control not contemplated by the Copyright Act.” (ibid., para. 56). Arguably, this is the closest the court gets in terms of doctrine per se.

E-books distinguished from software, not exhausted

Author: Emma Linklater (European University Institute, Florence)

Case No 4 O 191/11, Landgericht (German Regional Court) Bielefeld, 5 March 2013

Journal of Intellectual Property Law & Practice (2013), doi: 10.1093/jiplp/jpt124, first published online: July 23, 2013

According to the German Regional Court of Bielefeld, the Court of Justice of the European Union's (CJEU's) UsedSoft decision is not applicable to the resale of other digital content, and contractual provisions restricting use, insofar as they prohibit resale of downloaded e-books and audio books, do not place a disproportionate disadvantage on consumers.

Legal context

German and EU copyright provisions

Article 4(2) of the Information Society (InfoSoc) Directive provides for the exhaustion of the copyright holder's distribution right and is implemented by s 17(2) of the German Copyright Act (Urheberrechtsgesetz; UrhG). Although the UrhG makes no distinction between tangibles and intangibles, the InfoSoc Directive's Recital 29 does, expressly rejecting the exhaustion of ‘services, and online services in particular’.

On 3 July 2012, the CJEU responded to a preliminary reference in Case C-128/11 Usedsoft v Oracle relating to this issue in the context of digitally downloaded software. In this case, the CJEU found the specific Software Directive to be the applicable legal instrument, overriding the more general InfoSoc Directive.

Article 4(1) of the Software Directive gives rights holders the exclusive right to authorize reproduction, adaptation and distribution to the public. Article 4(2) provides that upon first sale of a copy of a computer program in the Community, the distribution right is exhausted. Article 5(1) stipulates that no authorization by the rights holder is required for reproduction or adaptation of the program where necessary for use by the lawful acquirer in accordance with its intended purpose. The CJEU held that the distribution right could be exhausted where the copyright holder has authorized a download of software via the internet, and that a second or subsequent acquirer could become a ‘lawful acquirer’. The provision of Article 5(1) enabled that lawful acquirer to make a copy of the file, without infringing the rights holder's reproduction right.

German contract law

Under s 307(1) of the German Civil Code, contract terms must not unreasonably disadvantage consumers contrary to the requirement of good faith. Under s 307(2)(II), an unreasonable disadvantage is presumed to exist if the contract limits the essential rights inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardized.

Facts

The defendant, an unnamed retailer, operates a website selling media in both physical and intangible (downloadable e-book and audio book) formats. Article 10(3) of the terms and conditions for sale provided that ‘the customer acquires the simple, non-transferable right to use the title offered for personal use only’. Additionally, the consumer's ability to copy, modify, transfer, make publically available, resell or use the download for commercial purposes was restricted.

The applicant, a German ‘umbrella’ consumer organization (Verbraucherzentrale Bundesverband; VZBZ), alleged that the contract clauses restricting use unreasonably disadvantaged consumers. The placement of e-books and audiobooks on the website and the use of ‘physical goods’ language employed would lead consumers to download them in good faith that they would have the same usage rights as for print books or CDs. Further, the contract terms went against the exhaustion principle set out in s 17(2) UrhG. Relying on UsedSoft, the applicant submitted that exhaustion should apply to both tangibles and intangibles alike, the decisive factor being that the contract concerns a marketable, tradable commodity.

Analysis

The court dismissed the action as unfounded. Looking first at the consumer contract at issue, the court found that the primary purpose of the contract with the defendant was to enable the consumer to ‘use’ the desired content; the defendant is therefore only contractually responsible for facilitating the download so that the content can be stored on the consumer's local disk to be accessed at will. Thus, from a contractual perspective, the contract's purpose is not endangered by limiting further sale or use. From the consumer's perspective, the court reasoned that, because consumers know about the piracy problem and since digital copies do not degrade with use, they expect that they will not be allowed to pass on their copies and anticipate that all they will get from the contract is the ability to download the content and the right to its personal use. According to the court, the terms are clear and precise so as not to mislead the consumer into thinking that he is getting a right that can be assimilated to a property right in a physical object.

In this case, the defendant's interest in preventing an uncontrollable and potentially infringing secondary market outweighed the consumer interest in establishing such a market. Since digital files can be transmitted instantly, without loss of quality, there is a strong economic risk for the defendant. However, no forward-and-delete technologies (as employed by Usedsoft or Redigi) were mentioned in this case. Accordingly, the consumer interest here was in accessing the download and in attaining a copy to read or listen to at will—not in being able to sell the file. Further, due to the lower price of downloadable e-books and audio books, ‘the average consumer’ should be satisfied with having the file for personal use.

Moving to the exhaustion issue, the court reiterated that Community exhaustion applies to the distribution right. The downloading of the file, however, creates a local copy and is therefore an act of reproduction. For a downloaded file to be legally resold, a further copy must be made; the distribution right must be exhausted, but also the acquirer must have the right to reproduce a copy to enable use. Referring to Usedsoft, it emphasized that the conclusions in that case were specific to the Software Directive because, through Article 5(1), reproduction without authorization is possible where necessary for use of by the lawful acquirer. In UsedSoft, the CJEU did not provide for the exhaustion of the reproduction right itself, but it was the combination of exhaustion of the distribution right and Article 5(1) which enabled resale of the downloaded software. The InfoSoc Directive, on the other hand, does not provide for such scenarios. Without an equivalent of Article 5(1), even if the distribution right could be exhausted the necessity of producing a reproduction copy to use the downloaded e-book or audio book would be an infringement.

Lastly, the court found that prohibiting copying by a third party or resale of the e-book or audio book file does not depart from the essential spirit of s 44a para 1 UrhG. The download and duplication here were intended and did not arise ‘incidentally during a technological process’.

Practical significance

One practical element—if not from a copyright perspective then from a business one—is the acceptance by the court that a lower price equals fewer rights, and that this is acceptable from a consumer perspective. This may be a relief to the publishing industry, but also contains a warning that for restrictions to personal use only to be warranted, there needs to be a consumer benefit in the form of increased accessibility through affordability.

Unfortunately, the significance of this decision is also limited by the lack of any reference to forward-and-delete technologies, which were seemingly not on the court's horizon. This limits the scope of the court's finding that the interest in preserving the rights holders' monopoly outweighs the consumer interest in allowing resale, since with such technologies, the rights holders’ interests can be preserved without an impact on piracy (ie one that one user's copy will be re-circulated). Further questions may be raised on appeal about the ‘reasonable consumer’ approach adopted: To assume that all consumers are aware of the contractual limitations of their downloaded content likely paints a simplified picture, since the growing number of business models promoting lending, sharing and cross-platform access have created a hazy grey-zone where ‘personal use’ is starting to be less clear.

Undoubtedly, the real significance of this decision comes more from its topicality than its substance. It essentially upholds the status quo; however, with the applicants set to appeal and against the backdrop of Redigi (see Case No 4 O 191/11, Landgericht [German Regional Court] Bielefeld, 5 March 2013] in the USA and the recent patents for ‘forward-and-delete’ technologies granted to tech giants Amazon and Apple, the issue of digital exhaustion does not look likely to go away this easily. Although there is little way that a regional court would have found UsedSoft to apply outside the (limited) context of the Software Directive, a judgment such as this making its way through the European legal system (again bearing in mind the music industry equivalent in the USA) could signal alarm bells in the minds of policymakers on both sides of the Atlantic. Although politicians have seemingly opted to keep silent on this issue for the moment, they are unlikely to be able to do so for long.

Davidoff criteria for exhaustion apply also if goods were first marketed within the EEA

Author: Maarten Schut (Kennedy Van der Laan, Amsterdam)

Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpp209

Makro Zelfbedieningsgroothandel CV and others v Diesel SpA, Case C-324/08, Court of Justice of the European Communities (ECJ), 15 October 2009

The ECJ rejected a suggestion put forward by the Dutch Supreme Court (Hoge Raad) that with respect to goods originating within the European Economic Area, the trade mark owner's implicit consent (leading to exhaustion) should not be tested under the strict criteria set out in the Davidoff decision but under more lenient criteria to be found in case law predating the Trade Mark Directive.

Legal context

A trade mark confers on the owner the right to prevent others from using the mark in the course of trade, such as by offering goods for sale or importing them under that trade mark. In the early days of the European Community, it was recognized that companies could use national trade marks in various Member States to partition the market, thus hindering the free movement of goods. A balance between the free movement of goods and the protection of IP rights was struck by the ECJ: a trade mark owner would not be allowed to prevent importation of goods which had been marketed in the Member State of origin either by himself or with his consent.

Such a principle of exhaustion would not affect the ‘specific subject matter’ of the trade mark right as the owner would still be the first to market the goods under the trade mark, nor would it affect the main function of the trade mark of guaranteeing to consumers the origin of the goods, in that they have been manufactured under the control of a single undertaking which is responsible for their quality. In several decisions (summarized in IHT Danzinger v Ideal-Standard, Case C-9/93), the ECJ ruled that the exhaustion principle would not only apply to a single owner holding various trade marks, but also to situations where separate entities were economically linked, for example, by belonging to the same group or being under a licensing arrangement.

The principle of exhaustion was codified in the Trade Mark Directive (Article 7), which specified that it applied to goods marketed within the Community (and later, the EEA). Several references called upon the ECJ to clarify this article and a consistent case law was developed. In Davidoff (Case C-414/99), the ECJ ruled that the trade mark owner's consent, having serious effect in extinguishing his exclusive rights, must be so expressed that an intention to renounce those rights is unequivocally demonstrated. Such intention will normally be gathered from an express statement of consent, but may also ‘be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market outside the EEA’. The ECJ made it clear that such implicit consent would be very difficult to prove in practice, by listing numerous circumstances (such as the trade mark owner being silent on the issue) which would not suffice.

Facts

Diesel SpA, known for its fashionable clothes and shoes, had the Spanish company Difsa as its distributor in Spain, Portugal, and Andorra. Difsa granted Flexi Casual exclusive selling rights in this territory for several goods including shoes with the DIESEL word mark, and a not very clearly formulated right to conduct ‘market tests’ with shoes of its own design under that mark. A manager of Flexi Casual then granted yet another company (Cosmos) a broader right to manufacture shoes under the DIESEL trade mark, which it started to do. Cosmos sold some of its shoes to other Spanish companies, which resold them to Makro, a wholesaler selling through its own supermarkets, in the Netherlands. Diesel relied on its Benelux word mark DIESEL to request an injunction in the Dutch courts, which was granted and upheld on appeal.

Analysis

The key question in the Makro/Diesel litigation was whether Diesel had given its implicit consent to putting the shoes manufactured by Cosmos on the market in Spain. The Dutch Court of Appeal applied the criteria set out in Davidoff, analysed the various contracts, and concluded that Diesel had not given such consent. Makro then argued before the Hoge Raad that the criteria developed in Davidoff should only apply to goods which had first been put on the market outside the EEA, but not to goods first marketed within the EEA. The Hoge Raad was sufficiently persuaded for it to make a reference to the ECJ, while carefully explaining the underlying reasoning. This may be summarized as follows.

At the time of introduction of the Trade Mark Directive, there was a certain acquis communautaire regarding exhaustion which (i) grew out of cases regarding trade between member states and (ii) related its criteria mainly to realizing the main function of trade marks, ie an indication of origin and guarantee of quality. With the introduction of Article 7 of the Trade Mark Directive, a new situation arose, in that a trade mark owner could first put his goods on the market outside the EEA and still prohibit importation into the EEA. New criteria were developed in Davidoff and other case law which were stricter than before, to ensure enjoyment of this right to control the first marketing within the EEA. But should the Davidoff criteria for (implicit) consent also apply to goods first marketed within the EEA and, if not, could the relevant criteria be found in the older acquis communautaire (as set out in IHT Danzinger)? Such criteria would, according to the Hoge Raad, without a doubt be more lenient or, put differently, would more readily lead to exhaustion.

The ECJ rejected this suggestion with, essentially, three arguments:

* The intention of the trade mark owner to renounce his rights must be unequivocally demonstrated and will normally be gathered from an express statement of his consent. However, ‘the requirements deriving from the protection of the free movement of goods have led the court to hold that such a rule can be qualified’. First, exhaustion can occur when the goods are put on the market by an operator with economic links to the trade mark owner. Secondly, even if the goods were first put on the market by a person having no economic link to the trade mark owner and without his express consent, the intention to renounce his rights may result from the trade mark owner's implied consent, which can be inferred on the basis of the Davidoff criteria. Thus the ECJ explicitly unites the old and new case law in one conceptual framework. Express consent is the norm; involvement of an entity linked to the trade mark owner (IHT Danzinger) and implicit consent (Davidoff) are both qualifications in the interest of the free movement of goods.

* Nothing in the Davidoff judgment leads to the conclusion that the criteria set out there would apply only in the factual context of that case.

* The distinction suggested by the Hoge Raad would run counter to the system established by the Directive. The Community rule of exhaustion applies only to goods which have been put on the market in the EEA with the trade mark owner's consent. Marketing outside the EEA does not have an exhaustive effect, so what is important is only the fact that the goods in question have been marketed in the EEA.

Thus the ECJ chose to adopt a straightforward approach and to neutralize the differences a careful reader might find between the case law developed before and after the introduction of the Trade Mark Directive. It is a pity the ECJ did not really address the main point raised by the Hoge Raad, ie that the high bar set for implicit consent by Davidoff seems legitimate if one wants to allow the trade mark owner to control the first marketing of his goods in the EEA even if he has already marketed them elsewhere, but less so if the goods originated in the EEA.
The answer of the ECJ is that the consent of a trade mark owner to the marketing of goods bearing his mark carried out directly in the EEA by a third party may be implied,

in so far as such consent is to be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market in that area which, in the view of the national court, unequivocally demonstrate that the proprietor has renounced his exclusive rights.

Practical significance

This decision clarifies the ECJ's conceptual framework when dealing with exhaustion, in particular in the grounds for the decision numbered 22–25. It confirms that the Davidoff criteria for implied consent apply to all goods, regardless where they were first put on the market.